ECO2030 1nd Edition Lecture 22 Outline of Last Lecture I The effects of international trade Outline of Current Lecture II The effects of international trade III The effects of tariffs IV arguments for and against international trade Current Lecture Quick review when you open up free trade you must except the world price Trade always makes people better off Recall that the problem shown in this graph is that it reduces employment Pric e Bef price ore After trad tradee What is done to address this problem is the use of tariffs However a tariff reduces total surplus because total surplus becomes less it moves the market closer to the equilibrium it had without trade A B C D Imports Domes tic Quantit y deman ded Dom estic Suppl y World Price Dome stic Dema Domes Quantit nd tic y Quantit y supplie d In this case area E government revenue from the tariff What is lost due to the tariff is area D and F They are lost for ever Total surplus before tariff A B C D E F G Total surplus after tariff A B C E G Consumers lose C D E F These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Producers gain C Government gains E Total surplus falls by D F Domestic Supply A The effects of a tariff price rises by the amount of the tariff Domestic quantity demanded decreases domestic quantity produced is increases demanders lose producers gain Price Before trade price w tariff price w o tariff c Tariff D G B E F Import s w tariff Imports w o tariff World Price Domestic Demand Quantity Other benefits from international trade increased variety of goods lower costs through economies of scale specialization increased competition enhanced flow of ideas Arguments for restricting trade The job argument trade with other countries destroys domestic jobs However free trade creates jobs at the same time it destroys them National security argument the industry is vital for national security when there are legitimate concerns over national security Infant industry argument new industries need temporary trade restrictions to help them get started difficult to implement in practice the temporary policy is hard to remove quickly protection is not necessary for an industry to grow if there product is better it will sell The unfair competition argument free trade is desirable only if all countries play by the same rules e g do not undervalue their currency to compete with lower input costs The protection as a bargaining chip argument Trade restrictions can be useful when we bargain with our trading partners However the threat may not work Summary of the effects of Tariffs Consumer surplus decreases Producer surplus increases Government gains tax revenue Total surplus is always less
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